Internet Sales Tax Fairness — Notification — Colorado


In February 2016, a federal appeals court upheld Colorado’s notification law in Direct Marketing Association v. Brohl [PDF]. In the opinion, Judge Matheson began by writing, “When a neighborhood bookstore in Denver sells a book, it must collect sales tax from the buyer and remit that payment to the Colorado Department of Revenue. When Barnes & Noble sells a book over the Internet to a Colorado buyer, it must collect sales tax from the buyer and remit. But when Amazon sells a book over the Internet to a Colorado buyer, it has no obligation to collect sales tax.”

The opinion continues:

“The plaintiffs haven’t come close to showing that the notice and reporting burdens Colorado places on out-of-state mail order and internet retailers compare unfavorably to the administrative burdens the state imposes on in-state brick-and-mortar retailers who must collect sales and use taxes. If anything, by asking us to strike down Colorado’s law, out-of-state mail order and internet retailers don’t seek comparable treatment to their in-state brick-and-mortar rivals, they seek more favorable treatment, a competitive advantage, a sort of judicially sponsored arbitrage opportunity or ‘tax shelter.'”

Earlier update: In January 2011, a federal district court issued a ruling that suspends enforcement of Colorado’s law pending the outcome of a case brought by the Direct Marketing Association, which claims the law violates the commerce clause of the U.S. Constitution by placing an excessive burden on out-of-state sellers. In March 2012, the court permanently enjoined the state from enforcing the law. Similar laws that require online sellers to notify purchasers of their tax liability, but do not require reporting to the state, have been enacted in Oklahoma and South Dakota.

Original rule:

In February 2010, Colorado passed a law that requires remote retailers (internet and catalog companies) that do not collect state sales taxes to notify Colorado customers that they owe the tax on their purchases. The law applies to retailers with more than $100,000 in annual sales, including and

Although out-of-state retailers are not required to collect sales tax in most states, customers still owe the tax and are suppose to include it with their state income tax returns. But few people do and it’s almost impossible to enforce.

Colorado’s law aims to increase compliance by individuals — and perhaps also to induce internet retailers to start collecting sales tax as a simpler solution than having to provide the various notifications required by the law.

Under the law, out-of-state retailers must include a notice on each invoice informing customers that the purchase is subject to Colorado sales tax and send a report to customers in January of each year detailing all of their purchases in the preceding year and the amount of sales tax owed. Retailers must also provide this information annually to the Colorado Department of Revenue. Failure to comply will result in fines of $5-10 per violation, which, in many cases, will be more than the sales tax owed. The law applies only to state sales tax (which is 2.9 percent as of this writing) and does not cover local and county sales taxes.

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Stacy Mitchell

Stacy Mitchell is co-director of the Institute for Local Self-Reliance and directs its Independent Business Initiative, which produces research and designs policy to counter concentrated corporate power and strengthen local economies.